Days After Resolving A $25 Million FCPA Enforcement Action, Novartis Again The Subject Of FCPA Scrutiny
Last week Novartis agreed to pay $25 million to resolve an SEC Foreign Corrupt Practices Act enforcement action concerning alleged conduct in China. (See here and here for prior posts).
According to this Reuters report:
“An anonymous whistleblower has accused Swiss drugmaker Novartis of paying bribes in Turkey through a consulting firm to secure business advantages worth an estimated $85 million, according to a Feb. 17 email seen by Reuters.
Friday Roundup
Nominate, scrutiny alerts and updates, and is it asking too much for the enforcement agencies to get the law right. It’s all here in the Friday roundup.
Nominate
As highlighted here, last month marked the six year anniversary of FCPA Professor. If FCPA Professor adds value to your practice or business or otherwise enlightens your day and causes you to contemplate the issues in a more sophisticated way, please consider nominating FCPA Professor for the ABA’s Top Legal Blog contest.
Scrutiny Alerts and Updates
Olympus
As highlighted in this prior post, Japan-based Olympus has been under FCPA scrutiny since at least August 2012 in connection with alleged relationships with physicians in Brazil. According to this company document the company recently recorded ¥2.4 billion (approximately $19 million) “based on progress in discussions with U.S. DOJ with regard to Foreign Corrupt Practices Act.”
This “Notice of Recognition of Extraordinary Loss Due to the Investigation by the U.S. Department of Justice Against Subsidiaries Relating to the Foreign Corrupt Practices Act” states:
“Olympus Corporation hereby announces that Olympus Latin America, Inc. (“OLA”), an indirect U.S. subsidiary of ours, and Olympus Optical do Brasil, Ltda. (“OBL”), a Brazilian subsidiary of OLA, have been under investigation by the U.S. Department of Justice (the “DOJ”) relating to the Foreign Corrupt Practices Act concerning their medical business, and that we have recognized an extraordinary loss in connection with such investigation for the first quarter of the fiscal year ending March 2016.
Background of this matter. In October 2011, Olympus Corporation of the Americas (“OCA”), a U.S. subsidiary of ours and the parent company of OLA, self-reported to the DOJ potential issues concerning OLA’s and OBL’s medical businesses in 2011 or earlier. OCA is currently continuing discussions with the DOJ towards a resolution, but in view of the progress at the present time, we have recorded an extraordinary loss of approximately 2,421 million yen as a provision.
Future outlook. In connection with this matter, we have recognized an extraordinary loss of approximately 2,421 million yen for the first quarter of the fiscal year ending March 2016, the results of which we are announcing today. However, there is no change to the consolidated earnings forecast due to this matter. We will promptly disclose developments concerning this matter.”
Orthofix International
As noted in this previous post, in July 2012 Orthofix International resolved a DOJ/SEC FCPA enforcement action concerning alleged conduct by a Mexican subsidiary. In resolving that action, the company agreed to a three year deferred prosecution agreement. During the term of the DPA, Orthofix disclosed that it was “investigating allegations involving potential improper payments with respect to our subsidiary in Brazil.”
Recently, the DOJ and Orthofix filed a Joint Status Report with the court stating:
“The DPA was scheduled to expire on July 17, 2015. The Department and Orthofix agreed on June 15, 2015, however, to extend the Term of the DPA for an additional two months in order to give the Department additional time to (1) evaluate Orthofix’s compliance with the internal controls and compliance undertakings in the DPA and (2) further investigate potentially improper conduct the company disclosed during the term of the DPA. The Department and Orthofix agree that this two-month extension extends all of the terms of the DPA and does not waive, or in any way prejudice, any of the Department’s rights under the DPA.
The DPA’s expiration date has thus been extended to September 17, 2015. The Department intends to complete its evaluation and further investigation in August 2015, and will notify the Court and Orthofix of its proposed course of action shortly thereafter.”
Och-Ziff Capital Management
The company has been under FCPA scrutiny since 2011 concerning various activities in Africa. Recently the Wall Street Journal went in-depth in this article titled “U.S. Probes Och-Ziff’s Mugabe Tie.” According to the article:
“U.S. authorities are investigating whether Och-Ziff Capital Management Group LLC knew that part of a $150 million investment in a small African miner would wind up in the hands of Zimbabwe President Robert Mugabe’s government, according to people familiar with the probe. Och-Ziff last year disclosed that a broader Justice Department and Securities and Exchange Commission investigation is examining the $47 billion New York hedge fund’s business in Africa under the Foreign Corrupt Practices Act. The act bars firms doing business in the U.S. from giving money or items of value to foreign officials for business, either directly or through intermediaries. The publicly traded hedge-fund firm is in talks to settle the probe into its ties to a network of investors and deal makers that it worked with on business from Libya to South Africa, according to people familiar with the investigation. Och-Ziff and others have poured hundreds of millions of dollars into mining operations in the past decade as commodities prices soared. In Zimbabwe, U.S. authorities are examining Och-Ziff’s connection to a $100 million payment to Mr. Mugabe’s government in early 2008, the people said. The investigation into Och-Ziff’s ties to the payment, which was made through the African mining company it invested in, Central African Mining & Exploration Co., or Camec, hasn’t been previously disclosed. Camec at the time described the payment as a loan. Och-Ziff has denied that it knew some of the money would end up with the Zimbabwe government. Human-rights groups said the funds were used to carry out a violent crackdown on the opposition during a tough election Mr. Mugabe ultimately won in 2008. U.S. investigators are scrutinizing a March 2008 trip to Zimbabwe taken by Och-Ziff’s Africa director at the time, Vanja Baros,according to people familiar with the investigation. The people said Mr. Baros met several people involved in channeling the money to the Mugabe government, includingBilly Rautenbach, a Zimbabwean businessman with close ties to the dictator.”
Vantage Drilling
The company recently disclosed:
“In July 2015, we became aware of media reports that our agent utilized in the contracting of the Titanium Explorer drillship has entered into a plea arrangement with the Brazilian authorities in connection with the agent’s role in obtaining bribes on behalf of former Petrobras executives. We have since confirmed that our agent, who has represented multiple international companies in their contracts with Petrobras, has entered into such discussions and provided evidence to the Brazilian authorities of an alleged bribery scheme between the former Petrobras executives and a former director of Vantage. The former director, Mr. Su, was the sole owner of the company that owned the Titanium Explorer at the time the alleged bribe was paid. We have not been contacted by any governmental authority in connection with these allegations. However, we voluntarily contacted the SEC and the Department of Justice (the “DOJ”) to advise them of these recent developments. We continue to investigate the matter, but as of now, our internal and independent investigations have found no evidence of wrongdoing by our employees or participation in any manner with the inappropriate acts alleged to have been conducted by the agent.
We cannot predict whether any governmental authority will seek to investigate this matter, or if a proceeding were opened, the scope or ultimate outcome of any such investigation. If the SEC or DOJ determines that we have violated the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), or if any governmental authority determines that we have violated applicable anti-bribery laws, they could seek civil and criminal sanctions, including monetary penalties, against us, as well as changes to our business practices and compliance programs, any of which could have a material adverse effect on our business and financial condition.
On August 21, 2012, we filed a lawsuit against Mr. Su, a former member of our Board of Directors and the owner of F3 Capital, our largest shareholder, asserting breach of fiduciary duties, fraud, fraudulent inducement and negligent misrepresentation, and unjust enrichment based on Mr. Su’s conduct in his dealings with the Company both immediately prior to, and during his tenure as one of our directors. On June 20, 2014, we received notice that Mr. Su had filed a countersuit against the Company and certain of the Company’s current and former officers and directors. The countersuit alleges fraud, breach of fiduciary duty, negligent misrepresentation, tortious interference with contract, and unjust enrichment and seeks indemnification from us with respect to the matters that are the basis of our lawsuit.”
NCR
As highlighted in this August 2012 post, NCR disclosed:
“NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act. NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue. NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing.”
Recently the company disclosed:
“With respect to the FCPA, the Company made a presentation to the staff of the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) providing the facts known to the Company related to the whistleblower’s FCPA allegations, and advising the government that many of these allegations were unsubstantiated. The Company responded to subpoenas of the SEC and to requests of the DOJ for documents and information related to the FCPA, including matters related to the whistleblower’s FCPA allegations. The Company’s investigations of the whistleblower’s FCPA allegations identified a few opportunities to strengthen the Company’s comprehensive FCPA compliance program, and the Company continues to evaluate and enhance its compliance program as appropriate.With respect to the DOJ, the Company responded to its most recent requests for documents in 2014. With respect to the SEC, on June 22, 2015, the SEC staff notified the Company that it did not intend to recommend an enforcement action against the Company with respect to these matters.”
To some, this represents a “declination.” To more sophisticated observers this appears to represent unfounded whistleblower allegations.
Alexion Pharmaceuticals
The company recently disclosed:
“[W]e received a subpoena in connection with an investigation by the Enforcement Division of the SEC requesting information related to our grant-making activities and compliance with the Foreign Corrupt Practices Act in various countries. The SEC also seeks information related to Alexion’s recalls of specific lots of Soliris and related securities disclosures. Alexion is cooperating with the SEC’s investigation, which is in its early stages. At this time, Alexion is unable to predict the duration, scope or outcome of the SEC investigation. Any determination that our operations or activities are not, or were not, in compliance with existing United States or foreign laws or regulations, including by the SEC pursuant to its investigation of our compliance with the FCPA and other matters, could result in the imposition of a broad range of civil and criminal sanctions against Alexion and certain of our directors, officers and/or employees, including injunctive relief, disgorgement, substantial fines or penalties, imprisonment, interruptions of business, debarment from government contracts, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence. Violations of these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on its reputation, business, results of operations or financial condition. Cooperating with and responding to the SEC in connection with its investigation of our FCPA practices and other matters, as well as responding to any future U.S. or foreign governmental investigation or whistleblower lawsuit, could result in substantial expenses, and could divert management’s attention from other business concerns and could have a material adverse effect on our business and financial condition and growth prospects.”
Flowserve
In 2008 Flowserve Corp. and related entities resolved a DOJ and SEC FCPA enforcement action related to the United Nations Oil for Food Program. In resolving the enforcement action, Flowserve agreed to pay $10.5 million in combined fines and penalties and agreed to a permanent “obey the law” injunction. (see here and here).
Recently, Flowserve disclosed:
“As previously disclosed in our 2014 Annual Report, we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act. We have completed our internal investigation into the matter, self-reported the potential violation to the United States Department of Justice (the “DOJ”) and the SEC, and are continuing to cooperate with the DOJ and SEC. We recently received a subpoena from the SEC requesting additional information and documentation related to the matter and are in the process of responding. We currently believe that this matter will not have a material adverse financial impact on the Company, but there can be no assurance that the Company will not be subjected to monetary penalties and additional costs.”
Is It Asking Too Much?
Practitioners recently snuffed out some subtle changes to the November 2012 FCPA Guidance issued by the DOJ and SEC.
The changes make the FCPA Guidance consistent with … well the law.
Is it asking too much for the enforcement agencies to get the law right? After all, it took the FCPA enforcement agencies over a year to write the pamphlet style FCPA Guidance.
But then again, the law has seemingly never been the FCPA enforcement agencies’ strong suit when all they have to do in the vast majority of situations is convince themselves of their legal interpretations.
The recent changes are not the biggest flub in the original FCPA Guidance.
As highlighted in this prior post, in the original guidance the enforcement agencies literally rewrote the FCPA statute. Only after being called out, did the Guidance change. (See here for the prior post).
To learn about other selective information, half-truths, and information that is demonstratively false in the FCPA Guidance see “Grading the Foreign Corrupt Practices Act Guidance.”
*****
A good weekend to all.
Friday Roundup
The anti-bribery business, quotable, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday Roundup.
“The Anti-Bribery Business”
Several articles have been written about FCPA Inc., a term I coined in April 2010 (see here), as well as the “facade of FCPA enforcement” (see here for my 2010 article of the same name).
The articles have included: “Cashing in on Corruption” (Washington Post); “The Bribery Racket” (Forbes); and “FCPA Inc. and the Business of Bribery” (Wall Street Journal).
I talked at length with The Economist about the above topics and certain of my comments are included in this recent article “The Anti-Bribery Business.”
“The huge amount of work generated for internal and external lawyers and for compliance staff is the result of firms bending over backwards to be co-operative, in the hope of negotiating reduced penalties. Some are even prepared to waive the statute of limitations for the conclusion of their cases. They want to be sure they have answered the “Where else?” question: where in the world might the firm have been engaging in similar practices?
In doing so, businesses are egged on by what Mr Koehler calls “FCPA Inc”. This is “a very aggressively marketed area of the law,” he says, “with no shortage of advisers financially incentivised to tell you the sky is falling in.” Convinced that it is, the bosses of accused companies will then agree to any measure, however excessive, to demonstrate that they have comprehensively answered the “Where else?” question. So much so that even some law enforcers have started telling them to calm down. Last year Leslie Caldwell, head of the DOJ’s criminal division, said internal investigations were sometimes needlessly broad and costly, delaying resolution of matters. “We do not expect companies to aimlessly boil the ocean,” she said.
Her words have provided scant comfort: defence lawyers say that their clients feel that if they investigate problems less exhaustively, they risk giving the impression that they are withholding information. Some say the DOJ is maddeningly ambiguous, encouraging firms to overreact when allegations surface.”
Quotable
Assistant Attorney General Leslie Caldwell is spot-on in this recent Q&A in Fraud Magazine as to the importance of uniquely tailored compliance.
“I think companies have to tailor their compliance programs and their investigative mechanisms to their businesses. There’s no one-size-fits-all compliance program. Different businesses have different risks. And a company needs to do an assessment that’s very tailored to their risks and game out what could go wrong and figure out how to prevent that from happening.”
She is less than clear though when describing when the DOJ would like companies to voluntarily disclose:
“We don’t want a company to wait until they’ve completed their own investigation before they come to us. We’ll give them room to do that, but there may be investigative steps that we want to take that maybe the company is not even capable of taking. We definitely don’t want to send a message that the company should complete its own investigation and then come to us. However, we obviously don’t expect a company to report to us as soon as it receives a hotline report that it hasn’t even checked into yet.”
For your viewing pleasure, here is the video of a recent speech by Caldwell (previously highlighted here) along with Q&A.
Scrutiny Alerts and Updates
Bilfinger
Reuters reports:
“German engineering firm Bilfinger has become the first international company to disclose to Brazil that it may have paid bribes as it seeks leniency under a new anti-corruption law, Comptroller General Valdir Simão said on Thursday. By reporting potential graft to the comptroller, known by the acronym CGU, Bilfinger hopes to continue operating in Brazil, Simão said, though it may still pay damages. “The company knows it will be punished in Brazil; it is not exempt from fines,” Simao said at a conference in Sao Paulo adding that in exchange the company could be guaranteed the right to keep operating in Brazil. Companies that are convicted for bribery could be banned from future contracts in Brazilunder the law, which took effect in January 2014. Bilfinger said in March that it may have paid 1 million euros to public officials in Brazil in connection with orders for large screens for security control centers during the 2014 soccer World Cup. It is conducting an internal investigation and collaborating with Brazilian authorities, Bilfinger said in a statement at the time. Five companies are pursuing leniency deals with the CGU, Simao said, adding that such deals are “quite new” for the country. Four are tied to a scandal at Brazil’s state-run oil firm Petroleo Brasileiro SA, he said.”
As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria. The enforcement action was resolved via a three-year deferred prosecution agreement.
Siemens
Reuters reports:
“A Chinese regulator investigated Siemens AG last year over whether the German group’s healthcare unit and its dealers bribed hospitals to buy expensive disposable products used in some of its medical devices, three people with knowledge of the probe told Reuters. The investigation, which has not previously been reported, follows a wide-reaching probe into the pharmaceutical industry in China that last year saw GlaxoSmithKline Plc fined nearly $500 million for bribing officials to push its medicine sales. China’s State Administration for Industry and Commerce (SAIC) accused Siemens and its dealers of having violated competition law by donating medical devices in return for agreements to exclusively buy the chemical reagents needed to run the machines from Siemens, the people said.”
In 2008, Siemens paid $800 million to resolve DOJ and SEC FCPA enforcement actions that were widespread in scope. The enforcement action remains the largest of all-time in terms of overall settlement amount.
Dun & Bradstreet
The company recently disclosed the following update regarding its FCPA scrutiny.
“On March 18, 2012, we announced we had temporarily suspended our Shanghai Roadway D&B Marketing Services Co. Ltd. (“Roadway”) operations in China, pending an investigation into allegations that its data collection practices may have violated local Chinese consumer data privacy laws. Thereafter, the Company decided to permanently cease the operations of Roadway. In addition, we have been reviewing certain allegations that we may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. As previously reported, we have voluntarily contacted the Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) to advise both agencies of our investigation, and we are continuing to meet with representatives of both the SEC and DOJ in connection therewith. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.
During the three months ended March 31, 2015 , we incurred $0.4 million of legal and other professional fees related to matters in China, as compared to $0.3 million of legal and other professional fees related to matters in China for the three months ended March 31, 2014.
As our investigation and our discussions with both the SEC and DOJ are ongoing, we cannot yet predict the ultimate outcome of the matter or its impact on our business, financial condition or results of operations. Based on our discussions with the SEC and DOJ, including an indication from the SEC in February and March 2015 of its initial estimate of the amount of net benefit potentially earned by the Company as a result of the challenged activities, we continue to believe that it is probable that the Company will incur a loss related to the government’s investigation. We will be meeting with the Staff of the SEC to obtain and to further understand the assumptions and methodologies underlying their current estimate of net benefit and will subsequently provide a responsive position. The DOJ also advised the Company in February 2015 that they will be proposing terms of a potential settlement, but we are unable to predict the timing or terms of any such proposal. Accordingly, we are unable at this time to reasonably estimate the amount or range of any loss, although it is possible that the amount of such loss could be material.”
Bio-Rad
The company disclosed as follows concerning civil litigation filed in the aftermath of its November 2014 FCPA enforcement action (see here for the prior post).
“On January 23, 2015, the City of Riviera Beach General Employees’ Retirement System filed a new shareholder derivative lawsuit in the Superior Court of Contra Costa County against three of our current directors and one former director. We are also named as a nominal defendant. In the complaint, the plaintiff alleges that our directors breached their fiduciary duty of loyalty by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA; that we failed to provide adequate training on the FCPA; and that based on these actions, the directors have been unjustly enriched. Purportedly seeking relief on our behalf, the plaintiff seeks an award of restitution and unspecified damages, costs and expenses (including attorneys’ fees). We and the individual defendants have filed a demurrer requesting dismissal of the complaint in this case.
On January 30, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Scott + Scott LLP on behalf of International Brotherhood of Electrical Workers Local 38 Pension Fund to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On May 1, 2015, International Brotherhood of Electrical Workers Local 38 Pension Fund filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.
On March 13, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Kirby McInerney LLP on behalf of Wayne County Employees’ Retirement System to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On April 21, 2015, Wayne County Employees’ Retirement System filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.”
Nortek
The company disclosed its FCPA scrutiny earlier this year and stated as follows in its recent quarterly filing:
“For the first quarter of 2015 approximately $1 million was recorded for legal and other professional services incurred related to the internal investigation of this matter. The Company expects to incur additional costs relating to the investigation of this matter throughout 2015.”
For the Reading Stack
From Global Compliance News by Baker & McKenzie titled “When a DPA is DOA: What The Increasing Judicial Disapproval of Corporate DPAs Means for Corporate Resolutions With the U.S. Government.”
“The legal setting in which corporations are negotiating with U.S. regulators is always evolving. Federal judges’ increasing willingness to second-guess negotiated settlements between the government and corporations is likely to encourage government attorneys to seek even more onerous settlements to ensure that judges do not reject them or criticize the agency in open court. Companies and their counsel should be ready to push back, using the judicial scrutiny to their advantage where possible.”
*****
A good weekend to all.
Issues To Consider From The FLIR Systems Enforcement Action
This recent post highlighted the SEC FCPA enforcement action against FLIR Systems.
This post continues the analysis by highlighting various issues to consider associated with the enforcement action.
Was the Enforcement Action “Just”
In the minds of some, “rogue employees” are mere figments in the imagination of corporate apologists.
Yet, the FLIR Systems enforcement action was based on the conduct of two individuals: Stephen Timms (Head of FLIR’s Middle East Office) and Yasser Ramahi who reported to Timms.
What did these two individuals do?
In the words of the SEC, the individuals “concealed” the extent and nature of the travel and gifts to “foreign officials” which gave rise to the enforcement action.
In the words of the SEC, after Timms’ manager asked certain questions about the travel, “Ramahi and Timms later claimed that the … ‘world tour’ had been a mistake” and that the foreign officials “used FLIR’s travel agent in Dubai to book their own travel and that it had been mistakenly charged to FLIR. They then used FLIR’s third-party agent to give the appearance that the MOI paid for their travel. Timms also oversaw the preparation of false and misleading documentation of the MOI travel expenses that was submitted to FLIR finance as the ‘correct’ travel document.”
Was the conduct of the two individuals, who concealed and lied, inconsistent with FLIR’s existing FCPA-related policies and internal controls?
Yes.
In the words of the SEC:
“During the relevant time, FLIR had a code of conduct, as well as a specific anti-bribery policy, which prohibited FLIR employees from violating the FCPA. FLIR’s policies required employees to record information “accurately and honestly” in FLIR’s books and records, with “no materiality requirement or threshold for a violation.” FLIR employees, including Timms and Ramahi, received training on their obligations under the FCPA and FLIR’s policy, although the company did not ensure that all employees, including Ramahi, completed the required training.”
Against this backdrop of SEC allegations, was it truly “just” for the SEC to find that FLIR Systems violated the FCPA’s anti-bribery provisions?
The same question can even apply to the SEC’s finding that FLIR Systems also violated the FCPA’s books and records and internal controls provisions.
In the words of the SEC:
“FLIR had few internal controls over travel in its foreign sales offices at the time. Although FLIR had policies and procedures over travel for its domestic operations, there were no controls or policies in place governing the use of foreign travel agencies. Instead, FLIR foreign sales employees worked directly with FLIR’s foreign travel agencies to arrange travel for themselves and others. Sales managers, such as Timms, were solely responsible for expense approvals for their sales staff. Timms’ manager was responsible for approving travel-related expenses for all non-U.S.-based senior sales employees (such as Timms) and approving the payment of large invoices to the foreign travel agencies.
FLIR also had few controls over the giving of gifts to customers, including foreign government officials. Sales staff and managers were responsible for all expense approvals for gifts and accounts payable was not trained to flag expenses that were potentially problematic.”
As a matter of law, the FCPA’s internal control provisions do not specify which type of internal controls provisions an issuer must have. Rather, the law states than issuer must have internal controls sufficient to provide reasonable assurances as to four general categories. The FCPA specifically defines “reasonable assurances” and “reasonable detail” as follows: a “level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
The only substantive judicial decision on the internal controls provisions states:
“The concept of ‘‘reasonable assurances’’ contained in [the internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”
The SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:
“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘‘Reasonableness,’’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.
Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure.”
Against this backdrop, it would seem relevant to the SEC’s internal controls finding regarding foreign travel that during the time period relevant to the enforcement action FLIR had approximately 2,100 employees, with approximately 1,400 located in the U.S.
Are the Post-Enforcement Action Reporting Obligations “Just”?
Against the backdrop of the SEC’s allegations, as well as the fact that FLIR Systems voluntarily disclosed and cooperated in the SEC’s investigation and undertook “significant remedial efforts,” was it “just” that the SEC required FLIR Systems, for a two year period, to report “periodically, at no less than nine months intervals” concerning the “status of its compliance review of its overseas operations and the status of its remediation and implementation of compliance measures?”
Or was the SEC’s condition of settlement yet another example of a government required transfer of shareholder wealth to FCPA Inc. (See here for the prior post).
Is the Disgorgement “Just”?
The bulk of the $9.5 million settlement ($8.5 million to exact) consisted of disgorgement and prejudgment interest.
The simplistic position that the SEC took (and often takes in FCPA enforcement actions) is that FLIR Systems would not have secured the business at issue with the Saudi Arabia Ministry of Interior (“MOI”) but for the alleged travel (which the SEC did acknowledge contained a core, legitimate business but morphed) and wrist-watches provided to the “foreign officials”.
Because FLIR System did obtain or retain such business, the theory goes, FLIR Systems was unjustly enriched and thus should disgorge its profits from the sales to the MOI.
This is so simplistic as to fail the basic smell test (see here, here, here and here for prior posts discussing the same general topic).
For instance, FLIR’s major customer base is governments around the world – including the U.S. government. Indeed, as noted in its most recent annual report:
“We derive significant revenue from contracts or subcontracts funded by United States government agencies. A significant reduction in the purchase of our products by these agencies or contractors for these agencies would have an adverse effect on our business. For the fiscal years ended December 31, 2014, 2013 and 2012 approximately 20 percent, 24 percent and 27 percent, respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies.”
Yet, in the SEC’s mind, FLIR was unjustly enriched when the Saudi MOI purchased its products because a few of its officials happened to go to, among other places, New York City in connection with a legitimate factory inspection tour or were provided with wrist-watches.
The Foolish of Obey the Law Injunctions
As noted in the SEC’s administrative order resolving the FCPA enforcement:
“On September 30, 2002, in connection with a settled accounting fraud case, the Commission ordered FLIR to cease and desist from violations of the anti-fraud and related provisions of the federal securities laws.”
As highlighted in the SEC’s order, the 2002 action focused on general revenue recognition and financial reporting issues. Yet, given the generic nature of the FCPA’s books and records and internal controls provisions, the SEC did find violations of those provisions in the 2002.
This is another reminder of the foolishness of the SEC’s so-called “obey the law injunctions” – which as explored in this guest post – have been found invalid because the injunction is so broad as to mean next to nothing.
No Disclosure
The vast majority of issuers under FCPA scrutiny disclose the scrutiny in SEC filings, notwithstanding the fact that in most instances there is no legal obligation to do so.
FLIR Systems was a unique example of a company not disclosing its FCPA scrutiny. The first the public learned about FLIR’s scrutiny was logically when the SEC brought the related enforcement against the former employees in November 2014.
Two Thoughts Regarding The Extension Of Biomet’s DPA
One reason to read FCPA Professor is it allows you to stay ahead of the curve and gain insight into the issues others will be talking about months or years later.
For instance, this July 2014 post highlighted how Biomet’s 2013 deferred prosecution agreement (concerned alleged conduct in Brazil, Argentina, and China) was at risk of being extended based on the company’s additional FCPA scrutiny in Brazil and Mexico.
Sure enough, recently Biomet disclosed:
“On March 13, 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment have been extended for an additional year.
Pursuant to the DPA, the DOJ has sole discretion to determine whether conduct by Biomet constitutes a violation or breach of the DPA. The DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA. The DOJ could, among other things, revoke the DPA or prosecute Biomet and/or the involved employees and executives. Biomet continues to cooperate with the SEC and DOJ and expects that discussions with the SEC and the DOJ will continue.”
Two thoughts regarding the extension of Biomet’s DPA.
First, the extension makes the DOJ look foolish.
Why?
Well, for many years the DOJ advanced the policy position that DPAs (and NPAs) “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.” (See here for the prior post). Specifically in the FCPA context, the DOJ stated that “the companies against which DPAs and NPAs have been brought have often undergone dramatic changes.” (See here for the prior post).
Yet, Biomet’s post FCPA enforcement action FCPA scrutiny puts it in a category of several other companies (such as Orthofix International, Willbros Group, Marubeni, Diebold, IBM, Tyco, Aibel Group, and Ingersoll-Rand) that have become the subject of additional scrutiny or enforcement after resolving FCPA enforcement actions through a DPA or agreeing to an SEC permanent injunction.
Second, and completely distinct from the first point, is the extension of the Biomet DPA shows how difficult FCPA compliance can be.
Why?
Because Biomet’s post FCPA enforcement action FCPA scrutiny demonstrates that not even companies with the greatest incentive to comply with the FCPA because they are:
(i) subject to post-enforcement action compliance obligations; and
(ii) subject to “double prosecution” for failure to do so
are able to ensure FCPA compliance across its business organization or eliminate FCPA scrutiny. In short, FCPA compliance can not be guaranteed in a business organization, rather steps can be taken that only minimize the risk of non-compliance occurring.